The stock market survives a scary week. Why this week could be scarier.

The

Dow Jones Industrial Average
gained 1.2% last week, while the

S&P 500
increased by 0.8%, and the

Nasdaq Composite
recorded an advance of 0.1%. For the Dow Jones, this was only the second rise in the past six weeks.

But let’s admit something here now. None of this is normal, not the politics, and certainly not the economics. The September jobs report was a disaster, but not because of the disappointing headline figure. Yes, the United States created just 194,000 jobs in September, well below the forecast of 500,000, and this is the kind of failure that would suggest an economic slowdown. The number, however, was almost meaningless, given seasonal adjustments – which may have skewed it lower – and compared to the household survey, which showed more than 500,000 new jobs as the unemployment rate fell to 4.8%. Try to make an investment decision from this.

“Investors should be careful to temper their reactions to the non-farm payroll report, which is quite volatile and typically undergoes significant revisions in the months following initial release,” writes Jason Pride, director of private wealth investments at Glenmede. .

Still, the market has tried to make the most of it. As bonds initially experienced a bit of buying, pushing yields lower, the 10-year Treasury ended the week with a yield of 1.6%, its highest since June, defying what seemed be bad news. The Dow ended Friday down 0.03%, while the S&P 500 was down 0.2% and the Nasdaq down 0.5%.

For the stock market to do next to nothing makes sense given the complexity of the employment situation. Job vacancies remain high, but the number of people leaving the labor market only seems to be increasing. Even the wage increase – average hourly wages rose 4.6% – failed to bring workers back. And this means that the labor market, despite an unemployment rate well above prepandemic levels of 3.5%, could actually be much more stringent than it looks.

The reality of rising costs, labor and raw materials, began to worry investors. According to an RBC Capital Markets survey, only 25% of investors expect corporate profit margins to increase over the next six to twelve months, up from 39% in June. Some 36% now expect margins to shrink, compared to 19%. Respondents are also increasingly pessimistic about the market: 28% now describe themselves as bearish, compared to 14%.

The worst may not be over yet, writes Lori Calvasina, head of US equity strategy at RBC Capital Markets. “The results of our own survey confirm our belief that the ongoing easing among institutional investors has not yet fully ended, which could contribute to increased volatility in the US stock market as a whole in the short term,” explains she does.

Investors will have a first reading of these fears when the earnings season begins next week. Banks are getting all the attention, and for good reason. Reports

JPMorgan Chase

(ticker: JPM),

Bank of America

(DOWN), and

Citigroup

(C) should help give the market a reading of the strength of the US economy, loan demand, and even consumer spending. (Financial sector profits are expected to rise 18%.) But other companies will give investors their own reading of costs and margins.

Fixation

(FAST), a distributor of industrial fasteners, is expected to report a profit of 42 cents a share on Monday, although it was demoted from

Wells fargo

Friday due to concerns about rising wages and freight costs.

Delta Airlines

(DAL) should give a read on wage pressures, as well as travel demand.

Just don’t expect the same kind of earnings season we’ve seen since Covid. Since the closings, most US companies have reported massive profit growth and sizable “beats”, but something has changed. Analysts have stopped revising their earnings expectations and lowered them instead. Profits are forecast to increase by more than 20% from the third quarter a year ago, although the growth rate is slowing. And with stocks still expensive – the S&P 500 is trading at 20.6 times expected 12-month earnings – there is little room for error. “There are a lot of adjustments that need to be made,” says Dave Donabedian, chief investment officer at CIBC Private Wealth US. “The market has more downside than upside in the short term.”

The new normal? Maybe it’s just more volatility.

Write to Ben Levisohn at Ben.Levisohn@barrons.com